April 29, 2012

It has nothing to do with age. Notice, I adorned OLD with quotation marks. It's rather related to obstinateness, which frequently becomes a distinct mark of business ownership. Many CEOs deliberately focus themselves on certain commanding tasks and stunt the expansion of their knowledge in any other areas. For example, your CEO could be a 30-year-old venture capital hot shot, or a 55-year-old veteran entrepreneur; most likely both possess mere basic computer skills.

Of course, they love electronic chotchkies, especially those that bring their huge mailboxes wherever they go. Then again, it's mostly just reading and writing emails, but not necessarily organizing. Most of them can use Word and Excel. Some can even create their own documents, but formatting, formulas, data manipulation, graphs and somesuch fancies are usually beyond them. Leave alone PowerPoint, Visio, Publisher and so on. God forbid they need to look up a customer's contact information in your ERP system - brace yourself for barrage of slander against "your choice" of software.

Obviously, the founders of high-tech startups don't count - everything "computer" comes natural to them. But I had a CEO only a few years ago who called his secretary into the office every time he needed to insert a column in a chart. And the funniest thing happens to these people every time you send them a spreadsheet set for printing on a legal-size paper. It's like a fucking stumbling block - they will spend at least 30 minutes trying to reset the printing area to fit the letter size before crying out for help.

For those employees who don't deal with execs on a regular basis this is somewhat perplexing, considering that most of entrepreneurs are quite capable, and sometimes even brilliant, people. But for those of us who daily interact with these semi-savants, the situation is absolutely clear. The limitations have nothing to do with their natural abilities. Their responsibilities lie in developing the business and creating jobs to fill them with people, who can produce pretty reports and fancy presentations. They don't need to occupy themselves with learning new tricks.

And that's absolutely fine. In fact, if I have to choose I'd prefer them perpetuating the business than learning how to create a pivot table. Yet, some situations are simply maddening.

I've been working on a fairly complicated customer-commitment program with one of my client's owner. Now, all steps developed and all kinks worked out, the project is supposed to culminate in an Agreement document. I drafted the first version and sent it out in the Word format for the boss's review.

An email comes back - no attachment. Instead, in the body of the message, there are multiple paragraphs of my document copied and pasted in black followed by his version of the same paragraphs in blue. The crazy thing is that on the first glance they look exactly the same, but somewhere in the middle there are several words altered. And it's like a half of the document is there. Basically, I have to visually compare both versions of each paragraph line by line to find the damn changes.

I was like, "What the fuck?!" and picked up the phone, "Adam, what are you doing? It seems like you've adjusted only a handful of minor points, but it will take hours to fish them out. Why didn't you make those adjustments directly in the document?" He is perplexed (probably thinks that I've gone momentarily stupid),"How would you know what I've changed then? You would have to comb through the entire document." The truth dawned on me, "You've never used Track Changes or Compare Documents functions before?" "I've never even heard of them."

Maybe I should've been ready for this after so many years of dealing with these people. I was somewhat stunned, nevertheless, and, in stupor, offered a training session free of charge. "Great," he said, "I am very excited. I will let you know when."

April 23, 2012

Louis C.K. is right - the shittiest cellphone on the market right now is an amazing piece of technology that, in its design and abilities, exceeded all expectations we had for hand-held devices twenty years ago (this is not the quote of the week, by the way). Business folk, plagued by the email-separation anxiety disorder, are especially grateful for the remedy introduced by BlackBerry twelve years ago. I know people (not me, though) who give an impression that they were born with a black thingy, adorned with a tiny LCD screen, growing out of the palms of their hands. Some of these addicts have become virtuoso thumb-typers. Still, from time to time the minuscule QWERTY keyboards respond with some hilarious pearls.

The following is taken from an actual email exchange between a Logistics Manager in front of her computer and a Sales Manager on his BlackBerry.

Quote

Logistics Manager:

I have to let go of the truck I've reserved for today's loading because we haven't heard from your customer.

April 20, 2012

Of course, it would be obnoxious to generalize my observations to include the entire class of business owners and chief executives (maybe they are not all the same), but every single CEO, with whom I've ever dealt, displayed the same behavioral pattern at the first sound of "bad news."

It's one of the most unpleasant experiences many financial professionals go through from time to time. The fiscal period (month, quarter, year) is closed and you look at the bottom line that is way below the company's target, or worse - the numbers are in red. You cannot help feeling singly responsible, simply because you are the first person to stare in the face of this unfortunate reality.

Yet, while it's true that a holistic CFO, the rightful member of an executive team, shares the P&L responsibility with the rest of the decision-making crew, unless she uses extravagantly expensive capital resources, her direct responsibility for the poor performance is highly unlikely. In fact, she probably anticipated this outcome and was doing everything in her power to prevent it: fought for better informed procurement decisions, higher efficiency, sensible distribution methodology, more selective sales, and so on.

Nevertheless, here are the results. The gross profit is too low, eaten away by sub-par sales. Some of new products couldn't make any money at all due to the lack of marketing and distribution efforts. There is a delinquent debt write-off on an account blessed by the boss for open terms. All these operational losses that you tried so hard to thwart.

And now it's time to present the results to the CEO. Frustrated by the company's poor performance, worrying about the impact the loss may have on the cash-flow, formulating the bullshit you will have to feed to the bankers to spin the disappointing news, you go through the established reporting protocol, whatever it is in you company: KPI tables, graphic dashboards, formal financial statements. As I said, in my experience the delivery of the news causes the same reaction: "We have to reduce our OVERHEAD!!!"

Overhead? We've kept our general and administrative expenses (G&A) stable for years! While we doubled our volume (triple, quadruple - whatever is your case), we managed to do so with a mere 10% increase in non-operating expenses. It's the gross margin we should be discussing. Alas, your reasonable arguments will break against the wall of stubborn conviction that overhead is the source of all evil.

Afterwards, the useless exercise of scrutinizing every single category of G&A will commence. You will have very expensive meetings with highly paid executive staff, including yourself, devoting their valuable time to discussions of $5,000 monthly Federal Express charges and $500 spent on various subscriptions. While you do that, another transaction bound to lose $250,000 will materialize, and then another, and another...

Why does it always happen like this? The answer is simple: only a handful of people are capable of facing their own failures without flinching away. It is very difficult for chief execs , who are frequently involved in operational management, sales, and business development, to admit that they don't really handle their side of the business too well. So, instead of dissecting the real causes, they jump on something they rarely control. And it's really funny, because a significant portion of the overhead is created by them. You know - travel, dinners, drinks, limos, perks, etc.

April 16, 2012

Theoretically, you can imagine an international business operating without a trade finance facility - no letters of credit, document negotiations, confirmations, etc. Your suppliers would be more than happy if you always pay in advance. On the other side of the equation, there are some desperate for product customers that you may be able to coerce into pre-payment plans, but, if you want to grow your volume, you will most likely end up extending them unsecured credit terms instead.

Let's pretend for a minute that we don't see the elephant in the room - the cost of working capital, which, under this stretched cycle of paying way before the product is received and collecting long after, turns into a painful burden on the profit margin. Let's ignore it and agree that yes, it is possible to conduct business in this way, especially if the company is cash-rich. It's possible, but dangerous and stupid for reasons too numerous to elaborate in one blog post. I'd say that the top 5 hazards of such modus operandi are as follows:

1. Risk that a foreign supplier will not deliver the product at all.

2. Risk that he doesn't comply with the terms of the purchase contract and delivers wrong goods of unacceptable quality and origin, in random quantities, too late or too early.

3. The danger of not receiving sufficient and correct set of documents that would allow you to claim the ownership.

4. Customer non-payment risk, which is always there when you give open terms, but especially if the payment is anxiously expected to come from abroad.

5. The overwhelming difficulties and costs of international litigation to recover your losses.

To mitigate these risks you need instruments that will protect you and an intermediary that will defend your trading fort. And that's when the trade finance divisions of various banks and financial institutions come into the picture with their Letters of Credits and related services. They can step in and be your guardian against the risks.

A Letter of Credit defines all conditions of purchase/sale, including documentary requirements; and only if these conditions are met, or when discrepancies are accepted, the money will exchange hands. So, the reality is that, you can have $100 million of free cash on your operating account, but if your business has an international exposure, you will end up engaging in Trade Finance relationships one way or another.

The trouble is that the banks know you need them and their benefits come with a price and many strings attached. Even if you only accept your customers' LC's, the cost of advising and processing services may be as high as 0.5% of the transactional value. If you buy product with LC's, then the costs could be as high as 2% (banks love this lucrative business). Yet, that's not the most strenuous part of the arrangement.

When a bank issues a Letter of Credit on your behalf, it takes an obligation to pay to the supplier even if your company goes bankrupt. Therefore, trade finance facility is essentially a credit line (most are utilized by LC's and advances alike). Obviously, to obtain any sizable credit line you must go through a grueling due diligence and you have to pay for it too: field exam, the bank's and your own attorneys' charges, closing fees - $10-12 million facility may end up costing around $150-$175K.

And even that is not the most painful part of the deal. The trade finance Credit Agreements are full of covenants and conditions that restrict your capital distribution, debt acquisition, treasury, operational management, and even dictate how the business is conducted. The banks demand collaterals and guarantees, including personal pledges from owners and their spouses. There are strict and voluminous reporting requirements.

And yet, we work very hard to get ourselves into the Trade Finance prison in order to facilitate our employers' commercial activities. The only thing we can do to ease the pain is to bitch and moan about the banks - a regular exercise of international-business CFO's around the world.

April 05, 2012

A couple of months ago I was working with a client, primarily concentrating on the improvement of accounting policies and the transition from QuickBooks to ERP. In the process, I interacted a lot with the company's staff accountant.

She is a sharp and ambitious young woman from Pacific Asia. I liked her very much and was particularly impressed by her outstanding work ethics (a rarity nowadays). She's been with the company for nearly two years and this was her first job after she got her BBA in Accounting.

Her knowledge of bookkeeping basics was pretty solid, which gave her much confidence. She was determined to leave the company and look for a job that would give her a faster career track. Never mind the fact that I've discovered a lot of errors and holes in those areas of company's records that pertained to somewhat more sophisticated concepts, such as Inventory/COGS conversion and revenue recognition.

It wasn't entirely her fault. She didn't have a benefit of working with a seasoned supervisor and wasn't savvy enough yet to understand that accountants were expected to look for standards pertaining to a specific industry. She is a capable individual, though, and most likely will get better with years. Hey, under contemporary standards, she is probably in a top 10% of quality workers. Those experience and knowledge gaps are not the reasons why I think it's unlikely for her to have a high-level career in an average American company.

Here is what happened during that consulting engagement. Facebook filed S1, thus making public its hopes for a $5 billion IPO. The 02/02/12 issue of The Economist arrived at the client's office with a cover spoofing Mark Zuckerberg's profile on his own website, completed with Caesar's boast as a "status" and comments from various "friends," including Bill Gates, Matt Romney, etc.

Unfortunately, the "author" of the most amusing comment was obscured by the embedded subscriber's label - one could only see two letters "ge." I read, "The Death Star is fully armed and operational" and laughed, "This must be Google." The girl was standing next to me. She said, "It's 'ge,' not le' we can see." I explained, it's Larry Page of Google. She looked doubtful and also didn't understand, why I found it so funny. Something hit me and I asked, "Do you know what the Death Star is?" She shook her head, "No."

I didn't show it, but I was very surprised. I understand that she was isolated from the rest of the world back home, but she graduated from high school and college here, in the States. I took her out for lunch and spent 40 minutes explaining: Larry Page, Sergey Brin, Google - Facebook competition, "Stars Wars," the Dark Side, Jedi, the irony of the reference - all fresh news to her.

This incident put me into an inquisitive mode and from time to time I threw well-camouflaged, unobtrusive questions at her.

"What kind of music to you like?" "Pop." "Like who?" "You wouldn't know them." "Try me. I am extremely eclectic when it comes to all arts. Who is your favorite band?" "They are all Asian."

Some time later she ventures, "What are your favorite bands?" "It's a long list, but there is a Top 10 that I can never rank - like Led Zeppelin, Radiohead, Nirvana, Pink Floyd, Queen..." She said she'd never heard those names. I am ready to give up, but still, "The Beatles is one of my Top 5." She has heard the name, but never listened to their music. My heart aches in utter pity.

Every night she watches funny videos from her home country on YouTube. How about TV? (C'mon, people all over the world watch American TV shows . In 2004, I flew from Amsterdam to Istanbul and saw a Dutch girl watching an episode of "Six Feet Under" on her laptop). Alas, not this girl, "I don't watch American television."

The question is, does this hard-working, diligent, and fairly bright person have a chance of ever becoming a partner in an accounting firm, or a corporate CFO, if the said companies are not under Asian management? Unlikely.

The higher you advance in your career, the more you have to communicate with people around you. Nobody sticks to just business, there is always the small-talk. People will be discussing the latest "Homeland" episode and she won't even know what it is? When everyone starts noticing, what will they think? In this country, pop culture is like English - a common language of the melting pot, and you must be able to speak it, or you will devalue yourself in the eyes of others.

To tell you the truth, in spite of my religious belief in the merit-based system, I don't think that this is wrong. You don't have to like pop culture and, like me, you can criticize its prevailing weaknesses all the time. Yet, not to be aware of it entirely - that's just strange. Someone who does her job well, but is so disinterested in her immediate surroundings, will be considered a reliable functionary, but unlikely to climb too high up the corporate ladder.

April 01, 2012

"CFO Techniques"was NOT written from an academic perspective, such as of a typical university professor with a consulting-for-large-business on the side.

On the contrary, it WAS WRITTEN by your fellow CFO, who earned her professional stripes in the small-business trenches. During more than 20 years of this hands-on experience, with the last 18 in CFO and Controller positions, she was fortunate to gain exposure to all facets of financial management and organizational administration. Just like the most of you, she knows only too well what it means to wear many hats at the same time.

Reason #2.

Yet, the author did not loose a constructive touch of a theoretician. In writing the book, she employed her:

in-depth knowledge of the fundamental principles that govern all areas of corporate accounting and finance,

methodical approach to all tasks that compile ever-expanding scope of a CFO's responsibilities,

and ability to dissect the cause and effect relationships of various concepts.

The result is the crystallization of the vast experience into a streamlined functional system, easily adaptable to various types of businesses and industries.

Reason #3.

"CFO Techniques" doesn't try to rehash official regulations, statistical information, bits of hot technology news, results of narrow studies, and such. The book's mission is to spotlight the most important areas of a CFO's or a controller's functionality:

Reason #4.

These professional cornerstones are broken down into crucial components described in bite-size, easily digestible chapters written in a fun and lithe language. The book presents the most complex financial and accounting concepts in comprehensive forms, which can serve as introductory aids for those who just attained their first controllership appointment and as concise refreshers for seasoned professionals.

Reason #5.

It is an unfortunate truth that millions of small businesses struggle (and frequently fail) to survive not because they are neglected by owners and managers, but because these hard-working people simply have no clue what exactly is wrong with their companies, where are the weakest points, which areas require immediate improvements. Smaller enterprises suffer the most from the lack, even complete absence, of business intelligence and performance analytics. "CFO Techniques" is a part of the author's personal crusade to help small and mid-size businesses by providing them with survival tools (analytical, budgetary, procedural, etc.) that don't require expensive and complicated software.

Reason #6.

One of the most unique and valuable devices offered within the book is the proprietary chart

INCOTERMS FOR ACCOUNTANTS.

Originally developed by Eclectic & Dynamic Controllership Consulting (E&D CC) specifically for businesses involved in buying and selling goods, it expands the definitions of standard Incoterms to include such accounting notions as title transfer rules and description of applicable source documents, thus accommodating needs of proper revenue, COGS, and inventory recognition.

Reason #7.

One of the main underlying themes of the book is the necessity for small-business CFO's and controllers to raise themselves above the bean-counting stereotype and become critical thinkers, indispensable members of the executive management team. "CFO Techniques" emphasizes this pressing demand throughout every section and accentuates the tasks that may facilitate such transformation.

Reason #8.

While shedding new light on the day-to-day routines and spinning conventional accounting and finance tasks as crucial and indispensable cogs in the business machine, the author's functional system gives equal rights to new categories of CFOs responsibilities, such as company-wide Information Technology Management, Risk Control, and Strategic Planning.

Reason #9.

The book takes a holistic approach to multi-faceted positions of CFOs and controllers and supplements specific structural guidelines and practical functional advices with discussions of more general topics applicable to any senior professional operating in private-business environment. Among others, it includes observations and suggestions on how to deal with people on different level of corporate hierarchy and what changes to expect in your future, even if at the moment you feel 100% secure.

Reason #10.

Even if you don't learn anything new, or if you'll find the book not applicable to your specific professional niche, at the very least you can entertain yourself with the multitude of eclectic cultural references and business insights from the author's personal experience woven through the book's text.